Private Lenders: How to Recover an Unpaid Loan

01 Before You Enforce: Establish Your Position

A missed repayment does not automatically entitle a lender to demand the entire balance or sell a secured asset. Those rights depend on the agreement, any applicable legislation and the steps already taken.

1. Assemble the documents. Locate the loan agreement, variations, guarantees, mortgage or security agreement, registration details, repayment ledger and correspondence.
2. Identify the default. Check the repayment dates, any grace period, acceleration clause and contractual notice requirements. Record extensions or repayment arrangements already agreed.
3. Calculate the debt. Separate principal, ordinary interest, default interest, fees and enforcement costs. Do not assume every amount described in the agreement is recoverable.
4. Check security and priority. Obtain current title, company and relevant PPSR searches. Earlier mortgages, other creditors and the asset's net sale value may determine whether enforcement is commercially worthwhile.
5. Choose a proportionate response. A documented repayment arrangement, refinance or consensual sale may produce a better result than immediate litigation. Where assets are at risk, urgent court relief may need consideration.

Keep communications in writing. Avoid threats of action you cannot lawfully take, and do not suggest that bankruptcy or winding up guarantees payment.

02 First Question: Is Your Loan Regulated?

Before serving a demand, determine whether the National Credit Code, in Schedule 1 to the National Consumer Credit Protection Act 2009 (Cth), applies. The description “private loan” does not create an exemption.

When the Code generally applies

Subject to statutory exclusions, section 5 generally covers credit where:

• The debtor is a natural person or a strata corporation.
• The credit is provided wholly or predominantly for personal, domestic or household purposes; to purchase, renovate or improve residential property for investment; or to refinance credit previously provided wholly or predominantly for that residential investment purpose.
• A charge is made for providing the credit, such as interest.
• The credit provider supplies it in the course of a business of providing credit, or as part of or incidental to another business.

Loans to ordinary companies and genuinely business-purpose loans are generally outside the Code. A natural person borrowing for residential investment property, however, can fall within it. Lending through a trust requires attention to the actual borrower and the transaction, not just the trust's name.

A business-purpose declaration is not a complete answer

A properly made declaration under section 13 can affect the Code's application. It must satisfy the statutory requirements and be made before the credit contract. It is ineffective where the lender, or another relevant person obtaining the declaration, knew or had reason to believe the credit would in fact be used wholly or predominantly for a Code-covered purpose.

Calling a loan a business loan does not make it one. Its purpose and the surrounding evidence matter.

Licensing, default notices and hardship

Engaging in regulated credit activities generally requires an Australian credit licence or an applicable authorisation or exemption. Licensing should be checked before lending, not only after default.

For a regulated credit contract, section 88 generally requires a compliant default notice allowing at least 30 days from the date of the notice to remedy the default before enforcement. The content, service requirements and exceptions must be checked. Different rules may also apply to acceleration, mortgages, guarantees and repossession.

A borrower may give a hardship notice under section 72. Section 89A can restrict enforcement while that process is addressed and, in applicable circumstances, for a period after the lender's response. An ordinary letter of demand does not necessarily satisfy these obligations.

If the loan is regulated, obtain advice on the entire enforcement sequence. A defective notice, unresolved hardship request or licensing issue can affect the lender's position even where repayments are plainly overdue.

03 Recovering a Secured Loan

Security can provide recourse to an asset, but it does not guarantee repayment. The security's validity, registration, priority, value and enforcement requirements all matter.

Registered mortgages over NSW land

For a registered mortgage under the Real Property Act 1900 (NSW), section 57 is central to the statutory power of sale. The Conveyancing Act 1919 (NSW) may also be relevant, depending on the mortgage and the power relied upon. The loan terms and, for regulated credit, the National Credit Code must be considered together.

1. Serve the required notice. Check the precise statutory and contractual requirements. The usual section 57 route involves default continuing for one month after service of the required notice. One month is not necessarily the same as 30 days.
2. Obtain possession lawfully. Where possession is contested, Supreme Court proceedings may be required. A judgment and writ of possession allow enforcement through the Sheriff. A consensual surrender or other lawful possession route may be available, but should not be assumed.
3. Exercise the power of sale properly. A mortgagee exercising a power of sale must meet the applicable duties, including under section 111A of the Conveyancing Act to take reasonable care to obtain not less than market value, or the best price reasonably obtainable where market value cannot be determined. Appropriate valuation, marketing and sale records are important.
4. Account for the proceeds. Apply sale proceeds according to the statutory and contractual priorities. Prior-ranking security, sale expenses and other entitlements can substantially reduce the funds available.
5. Assess any shortfall. Further recovery against the borrower or a guarantor depends on an enforceable personal obligation and the terms of the documents. A shortfall is not automatically recoverable from every person involved.

Possession proceedings and a Sheriff's eviction are not necessary in every mortgagee sale. Conversely, a registered mortgage is not permission to change the locks or disregard notice requirements.

A caveat is not a power of sale

A caveat protects a claimed interest in land by restricting registration of certain dealings while it remains effective. It does not create a security interest, establish that the claimed interest is valid, or give the caveator a mortgagee's power of sale.

The loan documents must support a caveatable interest, such as an equitable mortgage or charge. A right to repayment alone is not enough. A caveat also does not guarantee that every sale or refinance will be prevented.

If a lapsing notice is served under section 74J of the Real Property Act, the usual period is 21 days from service to obtain and lodge the necessary court order extending the caveat. Simply filing proceedings does not necessarily preserve it. Other removal procedures may involve different requirements. Seek advice immediately on receiving any notice.

A caveat can protect an existing interest. It cannot turn an unsecured promise to repay into a registered mortgage.

Vehicles, equipment and other personal property

For security over personal property, start with an enforceable security agreement. PPSR registration can help perfect the interest and protect priority, but registration alone does not create a right to seize or sell an asset.

Enforcement may engage Chapter 4 of the Personal Property Securities Act 2009 (Cth), as well as the agreement and other applicable laws. The rules address seizure, disposal, notices, redemption and accounting. Some provisions can be contracted out of in qualifying non-consumer transactions; others cannot.

Where the statutory disposal notice rule applies, section 130 generally requires at least 10 business days' notice, subject to exceptions. Section 131 imposes a duty to obtain market value or, where there is no market value, the best price reasonably obtainable. Repossession must be lawful: do not use force or trespass.

04 Recovering an Unsecured Loan

Without enforceable security, a lender will ordinarily need a judgment before using court enforcement against assets, wages or bank accounts. A judgment establishes an entitlement; it does not establish that the borrower can pay.

1. Demand payment correctly

A letter of demand should identify the agreement, default, amount properly due and deadline for payment. Follow any contractual and statutory notice requirements. If the whole balance is not yet due, check whether and how it can lawfully be accelerated.

2. Commence proceedings in the appropriate court

The appropriate NSW court depends on the amount claimed, the relief sought and jurisdictional rules. The Local Court's Small Claims Division hears claims up to $20,000; its General Division hears claims over $20,000 and up to $100,000. Larger claims may belong in the District Court or Supreme Court. Land possession proceedings and other forms of relief require separate consideration.

Do not choose the court solely by the outstanding principal: interest, costs, the nature of the claim and any counterclaim may affect the appropriate forum.

3. Consider default judgment or a defended claim

A defendant generally has 28 days after service of a statement of claim to file a defence under the NSW Uniform Civil Procedure Rules, unless a different period applies. If no defence is filed, default judgment may be available once the relevant procedural requirements are satisfied. It is not automatic, and can be set aside in appropriate circumstances.

If a defence is filed, the claim proceeds through the court process. Payment, disputed interest, variations, limitation periods and guarantee defences may all require evidence.

4. Enforce against an identified source of payment

• Garnishee orders. These can reach certain debts owed to the borrower, including bank funds or wages, subject to protections and limits.
• A writ for the levy of property. This permits the Sheriff to seize and sell eligible property. Statutory exclusions apply, and enforcement against land has additional requirements.
• Examination procedures. An examination notice requests financial information and documents. An examination order can require attendance to answer questions on oath about assets, income and liabilities.

Choose the method using current information. Spending money enforcing against assets already exhausted by higher-ranking creditors may only increase the loss.

05 Bankruptcy and Winding Up: Not Ordinary Collection Tools

Insolvency procedures can be appropriate where their legal requirements are met. They are collective processes, not a guarantee of full payment and not a substitute for deciding a genuinely disputed debt.

Individual borrowers

A bankruptcy notice ordinarily requires a qualifying final judgment or order for at least the applicable statutory minimum, with execution not stayed. Non-compliance within the required period can constitute an act of bankruptcy, but does not itself make the borrower bankrupt. A creditor must take the further steps required for a creditor's petition and a sequestration order.

Check the current monetary threshold, time for compliance, available objections and any application to set aside the notice before proceeding. Bankruptcy also involves costs and the possibility of little or no dividend to unsecured creditors.

Company borrowers

A statutory demand under section 459E of the Corporations Act 2001 (Cth) can be served for a qualifying debt that is due and payable, or qualifying debts, totalling at least the statutory minimum. A judgment is not essential; where the demand does not rely on a judgment debt, the required verifying affidavit must accompany it.

The company generally has 21 days after service to comply or to file and serve an application to set the demand aside. A genuine dispute about the debt, an offsetting claim, a defect causing substantial injustice or another sufficient reason can provide grounds to set it aside.

Failure to comply can support a statutory presumption of insolvency in a subsequent winding-up application, subject to the Act's requirements and timing. Winding up still requires a court order.

Do not use a statutory demand to pressure a company into paying a debt that is genuinely disputed. The demand can be set aside, with an adverse costs order.

A liquidator or bankruptcy trustee deals with assets for creditors under the applicable priorities. Secured and unsecured creditors may have different rights. Assess expected recoveries before incurring the costs of an insolvency application.

06 Do Not Overlook the Guarantor

A director, family member or business partner may have guaranteed the loan. Their liability must be established from the actual document, not assumed from their relationship with the borrower.

Check the scope of the guarantee, any cap, demand requirements, variations, discharge provisions and whether it contains a separate indemnity. Depending on the terms and applicable law, proceedings against a guarantor may be possible alongside a claim against the borrower.

For Code-regulated guarantees, additional protections apply. In particular, section 90 can require a demand and steps against the debtor before enforcement against the guarantor, subject to its exceptions. A commercial guarantee should not be treated as if the same rules necessarily apply.

Independent legal advice can be valuable evidence that the guarantor understood the transaction. An advice certificate does not make a guarantee immune from challenge. Undue influence, unconscionable conduct, misrepresentation, statutory protections and the circumstances in which the guarantee was obtained may still matter.

07 Mistakes That Delay or Undermine Recovery

“I can simply take the property.”

Self-help enforcement is not always prohibited, but it must be supported by the documents and the law. Unlawful entry, force, defective notices or interference with third-party rights can expose a lender to damages and other consequences. Obtain advice before taking possession.

Claiming every fee and an inflated default rate

A contractual default interest clause is not automatically enforceable. The penalty doctrine considers whether the stipulated consequence is out of all proportion to the legitimate interests protected, not simply whether it exceeds a calculation of direct loss. Consumer credit legislation and other laws may impose additional controls.

A disputed or inflated calculation can undermine a demand, make proceedings more complex and create particular risks when using a statutory demand.

Relying on a handshake

An oral loan may be enforceable, but proving the obligation and its terms can be difficult. A transfer record does not, on its own, establish whether the payment was a loan, gift or investment, or when repayment became due. Interest, guarantees and land security require particular attention to documentation and legal formalities.

Repeated informal extensions

Undocumented extensions can generate arguments about variation, waiver or estoppel. Record repayment arrangements, their effect on enforcement and any reservation of rights. A reservation is useful, but does not necessarily override inconsistent conduct or an agreed variation.

Waiting until the limitation period is about to expire

In NSW, claims founded on a simple contract generally have a six-year limitation period, while actions on a deed generally have a 12-year period. Secured principal and interest can be subject to different provisions. The date time starts running depends on the cause of action and the repayment terms; do not assume it is always the date of the last missed instalment or a later demand.

Acknowledgment or part payment may affect time in some circumstances, but should not be relied on without advice. Sending a demand alone does not stop a limitation period running.

08 Protecting Your Next Loan

Good recovery prospects begin before the funds are advanced.

• Document the transaction. Record the principal, purpose, repayment dates, interest, default events, notices, acceleration and recoverable costs. Ensure execution is valid.
• Check regulatory status. Investigate and retain evidence of the purpose of the credit. Obtain licensing and compliance advice where consumer or residential investment lending may be involved.
• Take effective security. Confirm ownership, the security agreement and registration requirements. Registration timing can affect priority and, for company borrowers, whether security survives insolvency.
• Assess guarantees properly. Consider the guarantor's capacity to pay as well as enforceability. Arrange appropriate independent advice without assuming a certificate eliminates every risk.
• Investigate the borrower and assets. Verify identity, corporate and trustee capacity, title, prior mortgages and realistic asset values.
• Allow a meaningful buffer. Account for prior debt, enforcement costs, accrued interest and market movement, rather than relying only on a headline valuation.
• Respond consistently to missed payments. Keep a complete ledger and written record. A prompt review can identify a workable repayment arrangement or the need for lawful enforcement.